2018 was a bumper year in the bulk annuity market. With over £24 billion of pension scheme liabilities insured, it blew the previous record of £14 billion out of the water. Demand has increased dramatically, and supply seems to be keeping pace for the moment. A further £12 billion of similar business was written between insurers, indicating the potential for further growth in pension scheme transaction volumes, but insurer quotation capacity is a limiting factor.

By Rosie Fantom FIA CERA, Associate and Bulk Annuity Consultant and Ben Pullen FIA, Partner and Head of PPF Services from Barnett Waddingham

A dynamic and fluid market

A busy marketplace has implications for schemes pursuing these kinds of transactions in the future. It may be a bigger market place, but it is likely that schemes will need to compete to attract insurers’ appetites to quote. But don’t confuse this with the frenzy of a Black Friday sale. Think of it more as a carefully considered purchase, where it pays to demonstrate the right preparation steps and a readiness to transact.

Which to choose and which is right?

Buy-ins and buy-outs have different purposes and should be considered accordingly.

Buy-in is an investment-based decision that must sit comfortably within the scheme’s journey plan. Typically undertaken for pensioner liabilities, schemes must find a balance between meaningfully reducing risk whilst retaining sufficient investment flexibility to achieve their long-term aims.

Buy-out is the ultimate endgame strategy and is where most schemes want to get to, by insuring all benefits. In practice, schemes may complete a buy-out in a single transaction or through a sequence of smaller buy-ins.

Quality always sells

For insurers, investing time in a particular bulk annuity case needs to make commercial sense. First impressions are important. How the scheme presents itself to market can significantly influence insurer engagement. This goes beyond the hygiene factors of clean data and benefits, but requires transparency of objectives and scheme requirements.

Giving the insurers the right information at the right time, coupled with a clear route to transaction that allows insurers to deliver their best proposals is likely to result in better outcomes for the scheme, and be viewed more favorably by insurers. Providing bulk annuity quotations is time consuming and costly, and insurers want to see a scheme with a credible request. They can generally tell a ‘fishing expedition’ from a genuinely considered approach to market.

From insolvency to successful bulk annuity transaction

Getting this process right can be truly beneficial for members.

Last year, the newly created BHS2 Pension Scheme successfully secured member benefits with an insurer.

The Scheme had been set-up following the insolvency of BHS. Members had the choice of remaining in the original schemes, which are expected to transfer to the Pension Protection Fund (PPF), or joining the new BHS2 scheme.

Once the choices had been made and the new scheme had been established, we advised the trustees to engage with the bulk annuity market to examine whether a transaction was feasible. When it became clear that a full buy-out may be achieved, it was full steam ahead.

Despite the unique circumstances – the scheme had no sponsor to fall back on – the trustees were very clear in what they needed to achieve. Leveraging on the significant preparation work already carried out, we were able to achieve a full buy-out in record time.

It really goes to show that if you do the hard yards in preparation for a de-risking exercise – however uncertain your future may appear – you will be well placed to take advantage of your adviser’s experience to maximise any opportunities in the BPA market.